Standard
Actuarial Policy
Financial Reporting Council
December 2012
AS TM1: Statutory Money Purchase
Illustrations
Version 3.0
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TM1: STATUTORY ILLUSTRATIONS OF
MONEY PURCHASE BENEFITS
Status
Legislation provides that statutory illustrations must be produced in
accordance with relevant guidance prepared by a prescribed body. The Financial
Reporting Council (FRC) has been appointed as the prescribed body for that
purpose. Technical Memorandum TM1: Statutory Money Purchase Illustrations is
that relevant guidance.
TM1 does not replace or amend the legislation. If it appears that any matter in
TM1 conflicts with any provision of the legislation then the latter will prevail.
The FRC does not accept any liability to any party for any loss, damage or costs
howsoever arising, whether directly or indirectly, whether in contract, tort or
otherwise from any action or decision taken (or not taken) as a result of any
person relying on or otherwise using this document or arising from any omission
from it.
Purpose
The purpose of TM1 is to specify the assumptions and methods to be used in the
calculation of statutory illustrations of money purchase pensions.
Application
TM1 applies to the production of any statutory illustration.
Effective date
TM1 version 3.0 is effective for statutory illustrations with an illustration date
on or after 6 April 2013. Providers may comply instead with TM1 version 2.0 for
statutory illustrations issued before 6 April 2014.
Future changes to TM1
The FRC reviews TM1 regularly. It is possible that the methods and assumptions
used will be amended as a result. It is likely that some of the assumptions in Part
C will be changed from time to time, and providers are strongly advised to take
account of the possibility of such changes when devising systems to produce
statutory illustrations.
Financial Reporting Council 1
CONTENTS
Part
A
B
C
2
Page
Interpretation
3
A.1
Interpretation of the text
3
A.2
Glossary
3
Determining the amount of pension to be illustrated
6
B.1
Introduction
6
B.2
The amount of pension to be illustrated
6
B.3
Accumulated fund
6
B.4
Current fund
7
B.5
Future contributions
8
B.6
Risk benefits
9
B.7
Annuity rate
10
B.8
General considerations
10
Assumptions
11
C.1
Introduction
11
C.2
Accumulation
11
C.3
Annuity
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A
INTERPRETATION
A.1
INTERPRETATION OF THE TEXT
A.1.1 This technical memorandum (TM1) should be interpreted in the light of
the purpose set out in the rubric on page 1.
A.1.2 Providers may adopt a different approach from that specified in TM1 if it
does not materially affect the result of the calculation of the statutory
illustration. For example, this may apply to the order in which the
calculations are carried out.
A.1.3 Any assumptions that are used which are not specified in TM1 should be
appropriate to the purpose of TM1 set out in the rubric on page 1. Such
assumptions might include the valuation of property assets or the
treatment of contributions if payment records are incomplete.
A.1.4 If a member’s current fund is invested in a with-profits fund (including
with-profits deferred annuity contracts) the statutory illustration should
be provided in a manner consistent with TM1 and with the insurer’s
bonus policy.
A.2
GLOSSARY
A.2.1 Terms appearing in bold in the text are used with these meanings:
accumulation rate
The annual rate of return assumed to be earned up to
retirement date from the current fund and future
contributions.
annuity rate
The value of an annual pension of £1 at retirement date
calculated using the assumptions specified in TM1.
current fund
The relevant assets of the scheme in relation to the
member’s money purchase benefits at the illustration date.
future
contributions
All money purchase contributions due after the illustration
date which the provider determines to be part of a regular
pre-determined series of contributions expected to continue
until the member’s retirement date.
illustration date
The date specified by the provider as the date by reference
to which amounts are calculated for the purpose of the
statutory illustration.
The illustration date will normally be the specified date.
inflation factor
The accumulated assumed inflation from the illustration
date to the retirement date.
inflation rate
The assumed annual rate of inflation.
Financial Reporting Council 3
legislation
Legislation governing the provision
illustrations including but not limited to:
of
statutory
a) the Pension Schemes Act 1993 (c.48) Section 113;
b) the Personal Pension Schemes (Disclosure
Information) Regulations 1987 (SI 1987/1110);
of
c) the Occupational Pension Schemes (Disclosure of
Information) Regulations 1996 (SI 1996/1655);
d) the Stakeholder Pension Schemes Regulations 2000 (SI
2000/1403);
e) the Occupational and Personal Pension Schemes
(Disclosure of Information) Amendment Regulations
2002 (SI 2002/1383); and
f)
the Occupational, Personal and Stakeholder Pension
Schemes (Disclosure of Information) Amendment
Regulations 2010 (SI 2010/2659).
Northern Ireland has its own body of law relating to pensions
with corresponding legislation.
member
Any person eligible to receive a statutory illustration from a
scheme.
nominal
accumulated fund
The current fund and future contributions accumulated to
the retirement date adjusted where relevant for tax relief,
charges and expenses.
provider
The trustees or managers of a scheme, or any other party
preparing a statutory illustration on their behalf. Other
parties might include advisers, insurance companies or
software houses.
real accumulated
fund
The nominal accumulated fund expressed in today’s
(inflation adjusted) terms.
retirement date
A date which the member has specified to the provider and
which is acceptable to the provider; or where no acceptable
date has been specified by the member, a date specified by
the provider.
A member may have more than one retirement date for
different funds or contracts within a scheme.
risk benefits
Benefits payable on death, sickness or critical illness.
scheme
A pension arrangement that is required to provide a
statutory illustration under the legislation.
scheme year
The period specified for the provision of a statutory
illustration.
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TM1 v3.0 (December 2012)
specified date
The date the fund is valued for the purpose of the
legislation. For an occupational pension scheme, this is
normally the last day of the scheme’s administrative year.
statutory
illustration
The amount of pension calculated in accordance with TM1.
statutory
illustration
statement
The statutory illustration and accompanying information.
Financial Reporting Council 5
B
DETERMINING THE AMOUNT OF
PENSION TO BE ILLUSTRATED
B.1
INTRODUCTION
B.1.1 This Part sets out the method which must be followed for calculating
statutory illustrations.
B.2
THE AMOUNT OF PENSION TO BE ILLUSTRATED
B.2.1 The statutory illustration is the annual amount of pension calculated
by dividing the real accumulated fund (see section B.3) by the annuity
rate (see section B.7).
B.2.2 The statutory illustration must be shown in whole pounds, rounded
down to 3 significant figures. If the result is under £1,000 and is not an
exact multiple of £10, it may be rounded down to the next lower multiple
of £10.
B.2.3 Any resulting monthly pension of less than £10 may be shown as “less
than £10 each month” or “less than £120 each year”.
B.3
ACCUMULATED FUND
B.3.1 The real accumulated fund must be calculated by dividing the nominal
accumulated fund by the inflation factor (see paragraph B.3.5).
B.3.2 The nominal accumulated fund must be calculated as the sum of:
• the accumulated current fund, if any;
• the accumulated future contributions, if any; and
• the accumulated amount of any tax relief expected to be reclaimed and
credited to the scheme for the benefit of the member in respect of
future contributions;
reduced by:
• the accumulated amount of the costs of any risk benefits; and
• the accumulated amount of charges or expenses, if the terms of the
scheme require such charges or expenses to be deducted from future
contributions or the current fund.
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B.3.3 Each element of the nominal accumulated fund must be accumulated
from the relevant date to the retirement date at the rate of accumulation
determined in accordance with paragraphs C.2.3 to C.2.6. The relevant
date is:
• for the current fund, the illustration date;
• for each individual payment of future contributions or tax relief, the
date on which the payment is due to be received by the scheme; and
• for each individual payment of charges or expenses or cost of risk
benefits, the date on which the payment is due to be paid.
B.3.4 If the nominal accumulated fund is less than zero, zero must be used
instead.
Inflation factor
B.3.5 The inflation factor must be calculated by compounding the inflation
rate specified in paragraph C.2.7 from the illustration date to the
retirement date.
B.4
CURRENT FUND
B.4.1 The current fund is the value of the relevant assets of the scheme in
relation to the member’s money purchase benefits at the illustration
date. The current fund must be based on a realistic asset value such
as:
a) the market value of the assets;
b) the bid value of relevant units;
c) for an insured scheme, the policy value on an ongoing basis;
d) for a scheme where a member’s rights are determined as a share of
the scheme’s assets, the value of the member’s share; or
e) for a with-profits fund or if assets are not readily marketable, a value
consistent with the principles of TM1 .
B.4.2 The current fund includes allowances for any contributions due at the
illustration date and for the recovery of any tax due to the illustration
date. It is not necessary to discount these allowances from their
expected payment dates. Allowances which are unlikely to change the
statutory illustration may be omitted.
B.4.3 A provider may omit the allowances referred to in paragraph B.4.2 from
the current fund, provided that if there are future contributions, any
items due but unpaid which have been omitted from the current fund
are treated as future contributions.
B.4.4 If the member is in receipt of income drawdown in respect of part of the
assets of the scheme, those assets must be omitted from the current
fund.
Financial Reporting Council 7
B.4.5 Outgoing transfer values which have been agreed but not paid on or
before the illustration date must not be deducted from the current
fund.
B.5
FUTURE CONTRIBUTIONS
B.5.1 Future contributions are all money purchase contributions due after
the illustration date which the provider determines to be part of a
regular pre-determined series of contributions, irrespective of the formal
basis on which contributions are determined. They do not include
contributions made after the illustration date which are not part of a
series of pre-determined payments which are expected to continue.
B.5.2 When determining whether a member should be treated as paying
future contributions, providers should take into account factors
including the member’s expectations and the certainty of payment. In
the following examples the member should normally be treated as
paying future contributions:
• a member of an occupational scheme paying a percentage of
earnings from time to time (irrespective of whether or not the member
has an option to change the percentage rate); an exception might be if
the member is employed on a short-term contract and there is no
continuity of employment or of contributions;
• a member paying regular contributions into a personal pension or
stakeholder pension scheme under a direct debit or standing order;
• it is clear from the provider’s records that regular payments (such as a
particular cash amount or a percentage of earnings) are intended; and
• a scheme’s terms describe future money purchase contributions as
being single payments, and they form a series of pre-determined
payments which are expected to continue until the member reaches
retirement date or State Pension Age.
Initial level of future contributions
B.5.3 The initial level of future contributions must be the actual amount of
future contributions payable for the scheme year following the
illustration date if it is known.
B.5.4 If paragraph B.5.3 does not apply and if the amount of future
contributions is determined as an amount which increases in line with
inflation or as a proportion of the member’s earnings, the initial level of
future contributions must be the latest known amount of contributions
increased for the appropriate period at the rate specified in paragraph
C.2.7 or C.2.8 respectively.
B.5.5 If neither paragraph B.5.3 nor paragraph B.5.4 applies the initial level of
future contributions must be the last known annual amount.
B.5.6 If the amount of future contributions is related to the member’s
earnings and if the provider does not have detailed information about
the member’s earnings or if earnings are expected to fluctuate
significantly from year to year, the initial level of future contributions
must be estimated.
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B.5.7 For many occupational schemes the definition of earnings for pension
contributions is updated annually, on the first day of the scheme year. In
such cases the initial level of future contributions may be based on the
member’s earnings on the day after the illustration date. Providers
may ignore any information they have about changes in the member’s
earnings which occur after the day after the illustration date.
Subsequent levels of future contributions
B.5.8 Future contributions must be assumed to increase in accordance with
scheme provisions or with recognised practice. If there are no scheme
provisions regarding the increase of contributions, or if there is no
recognised practice of increasing contributions, future contributions
must be assumed to remain unchanged until retirement date.
B.5.9 Future contributions which are determined as a proportion of the
member’s earnings must be assumed to increase at the rate specified in
paragraph C.2.8.
B.5.10 Future contributions which increase in line with inflation must be
assumed to increase at the rate specified in paragraph C.2.7.
B.5.11 It may be assumed that future contributions which relate to the
payment of the maximum non-earnings-related amount into a personal
or stakeholder pension scheme remain fixed or increase at the rate
specified in paragraph C.2.7.
B.5.12 If the amounts of contributions payable are subject to a maximum of a
fixed monetary amount or a deduction of a fixed monetary amount the
provider must deal with the situation in an appropriate manner.
B.5.13 A deduction which is specified in such a way that it will, or is expected
to, increase broadly in line with State benefits or contribution limits or
with earnings must be assumed to increase at the rate specified in
paragraph C.2.7 or C.2.8 as appropriate.
B.5.14 Contributions which are age-related or term-related must be dealt with in
an appropriate manner.
B.5.15 If the last known amount of contributions does not relate to a period of
12 months the provider must deal with the situation in an appropriate
manner.
Transferred benefits
B.5.16 Incoming transfer values which have been agreed but are outstanding at
the illustration date must not be included in future contributions.
B.6
RISK BENEFITS
Initial level of the cost of risk benefits
B.6.1 If the cost of risk benefits payable for the scheme year following the
illustration date is known, it should normally be used for the initial level
of the cost of risk benefits.
Financial Reporting Council 9
B.6.2 If paragraph B.6.1 does not apply and if the cost of risk benefits is
determined as an amount which increases in line with inflation or as a
proportion of the member’s earnings, the initial cost of risk benefits
should be the latest known cost increased for the appropriate period at
the rate specified in C.2.7 or C.2.8 respectively.
B.6.3 If neither paragraph B.6.1 nor paragraph B.6.2 applies, the initial cost of
risk benefits should be the last known annual amount.
B.6.4 If the last known cost of risk benefits does not relate to a period of 12
months the provider must deal with the situation in an appropriate
manner.
Subsequent levels of the cost of risk benefits
B.6.5 If risk benefits are determined as a proportion of the member’s
earnings their cost must be assumed to increase at the rate specified in
paragraph C.2.8.
B.6.6 If the cost of risk benefits increases in line with inflation it must be
assumed to increase at the rate specified in paragraph C.2.7.
B.6.7 If the cost of risk benefits increases as the member ages then
providers must deal with the situation in an appropriate manner.
B.6.8 If none of paragraphs B.6.5 to B.6.7 applies, the cost of risk benefits
must be assumed to increase at the rate specified in paragraph C.2.7.
B.7
ANNUITY RATE
B.7.1 The annuity rate is the value of an annual pension of £1 at retirement
date calculated using the assumptions in Part C.
B.8
GENERAL CONSIDERATIONS
B.8.1 Appropriate adjustments to the calculations must be made if a scheme
year is not a period of 12 months. Where annual rates are specified in
Part C, the equivalent rates for part of a year should be calculated as the
appropriate root of the annual rate, not as an arithmetic proportion. For
example, the monthly rate equivalent to 2.5% per annum is
approximately 0.00206 (1.025^(1/12)-1) and not 0.00208 (0.025/12).
B.8.2 If it is necessary to calculate the period between two dates, the period
must be calculated to an exact number of months or more accurately (for
example, to the exact number of days). Similarly, if contributions will
continue for part of a year, statutory illustrations must include an
allowance for such contributions for an exact number of months or more
accurately.
B.8.3 The pension illustrated may be shown as a weekly, monthly or annual
amount.
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TM1 v3.0 (December 2012)
C
ASSUMPTIONS
C.1
INTRODUCTION
C.1.1 This Part sets out the actuarial assumptions which must be used in
providing statutory illustrations.
C.2
ACCUMULATION
C.2.1 This section specifies the assumptions to be used in determining the
real accumulated fund.
Mortality
C.2.2 No allowance is to be made for mortality before retirement (other than in
the calculation of the cost of any risk benefits).
Accumulation rate
C.2.3 In determining the accumulation rate the provider must take account
of the expected returns from the current and anticipated future
investment strategy of the member’s funds over the period to the
retirement date.
C.2.4 The accumulation rate must be based on expected returns before the
deduction of expenses or charges.
C.2.5 The accumulation rate must be justifiable and consistent with the
inflation rate assumption specified in paragraph C.2.7.
C.2.6 The method used to determine the accumulation rate in accordance
with paragraphs C.2.3 to C.2.5 should be consistent from year to year,
and the rationale used should be documented and made available to
members on request.
Rates of increase in inflation and earnings
C.2.7 The inflation rate must be 2.5% per annum compound.
C.2.8 Earnings and any earnings-related indices must be assumed to increase
at 2.5% per annum compound.
Financial Reporting Council 11
Expenses
C.2.9 If the terms of a scheme require future charges or expenses to be
deducted from future contributions or the current fund, then:
• for schemes subject to the FSA Rules on projections, charges or
expenses must be assumed to be an amount not less than those
required by the FSA Rules;
• for other schemes, amounts no less than the actual charges or
expenses of the member’s arrangement must be assumed. The
assumed charges or expenses should include the costs of investment
management, but exclude any dealing costs for the underlying portfolio
and any routine management and servicing costs of existing property
investments.
C.2.10 Future charges or expenses which are related to future contributions
(such as those which are calculated as a percentage of contributions)
must be calculated by reference to the future contributions.
C.2.11 Future charges or expenses up to retirement date which are related to
the scheme’s assets must be calculated using a projected fund as at
each annual anniversary of the illustration date or, more frequently,
from the illustration date to the retirement date. The projected funds
must be based on the current fund and allow for any future
contributions, tax relief, the cost of risk benefits and relevant charges
or expenses.
C.2.12 If future charges or expenses are not known and cannot reasonably be
obtained or estimated, the approach set out in paragraph C.2.11 must
be used with charges or expenses of 1% per annum of the projected
fund at the start of each year.
C.2.13 Future charges or expenses which relate to the member’s arrangement
and which are not deducted from future contributions or from the
underlying assets must be ignored for the production of the statutory
illustration.
Tax relief on contributions
C.2.14 Tax relief must be assumed to be at the rate at which it is expected to be
reclaimed. The expected rate should allow for any known future
changes.
C.3
ANNUITY
Lump sum at retirement
C.3.1 No allowance may be made for the payment of a lump sum at
retirement.
Interest rates to be used in calculating annuity rates
C.3.2 The rate of interest must be determined as at each 15 February. This
rate must be used for all statutory illustrations with illustration dates
occurring in the following financial year (6 April to 5 April). If the
information on which the rate of interest is to be based is not published
12
TM1 v3.0 (December 2012)
for 15 February, providers must use the relevant information for the
previous business day for which such information is published.
C.3.3 The annuity rate must be calculated using annual interest equal to 50%
of the sum of the FTSE Actuaries Government Securities Index-Linked
Real Yields over 5 years assuming:
• 5% inflation; and
• 0% inflation
minus 0.5%.
C.3.4 The interest rate must be rounded to the nearest multiple of 0.2%.
Intermediate exact multiples of 0.1% should be rounded down.
C.3.5 Published interest rates must be used without any adjustments (such as
to convert the published rate from a convertible half-yearly rate to an
annual rate).
Expenses
C.3.6 An allowance of 4% of the value of the annuity at retirement must be
made for expenses.
Mortality
C.3.7 The mortality of the member and the member’s spouse or civil partner
must be based on the year of birth rate derived from the Institute and
Faculty of Actuaries’ Continuous Mortality Investigation tables PCFA00
and PCMA00 and including mortality improvements derived from each of
the male and female annual mortality projection models, in equal parts.
C.3.8 For statutory illustrations produced with illustration dates in the
range
6 April 20YY to 5 April (20YY+1), mortality improvements must be
derived from the CMI mortality projection models 1 CMI_(20YY1)_F[1.25%] and CMI_(20YY-1)_M[1.25%].
C.3.9 For example, statutory illustrations produced with an illustration date
of
6 April 2014 the mortality assumptions must be based on
50%
of
PCMA00
CMI_(2013)_M[1.25%] +
including
improvements
based
on
50%
of
PCFA00
CMI_(2013)_F[1.25%].
including
improvements
based
on
C.3.10 These rates of mortality improvement apply to both the member and the
member’s spouse or civil partner.
1
The model can be found at: http://www.actuaries.org.uk/knowledge/cmi
CMI_20NN_x [a%] refers to the model published by the CMI where:
•
20NN is the version number of the model reflecting the year of its publication;
•
x is the gender and is either M (male) or F (female); and
•
a% is the long-term rate of mortality improvement.
Financial Reporting Council 13
Spouse’s or civil partner’s pension
C.3.11 Legislation specifies the assumption to be used for the amount of
pension to be provided to the spouse or civil partner on the death of the
member.
Age difference between member and spouse or civil partner
C.3.12 It must be assumed that a husband is three years older than his wife and
that those in a civil partnership are the same age as each other, except
that:
• at the provider’s discretion the member may specify the spouse’s or
civil partner’s age to be used;
• the spouse’s or civil partner’s age shown in the provider’s records may
be used.
Guaranteed annuity terms
C.3.13 No account should be taken of a guarantee of annuity terms which
produces a higher amount of initial pension as at the retirement date, or
a higher amount of pension in a subsequent year, than would be
produced using the assumptions in TM1.
Payment frequency and format
C.3.14 When calculating the annuity rate, providers may allow for benefits,
other than a spouse’s or civil partner’s pension, payable on the death of
the member after the pension commences (such as the payment of the
balance of five years’ payments on death within five years after
retirement).
C.3.15 The pension illustrated must be assumed to be payable monthly in
advance and increase annually in payment in line with inflation. Pension
increases in payment in line with inflation are implicitly allowed for in the
rate of interest specified in paragraph C.3.3.
Version
Effective from
1.0
06.04.03
1.1
05.04.05
1.2
01.11.06
Adopted by the FRC on 06.04.07
1.3
06.04.09
1.4
08.02.11
2.0
06.04.12
3.0
06.04.13
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TM1 v3.0 (December 2012)
Financial Reporting Council
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